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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
Commission file number 0-22227
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PROBUSINESS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2976066
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
</TABLE>
4125 HOPYARD ROAD
PLEASANTON, CA 94588
(Address of principal executive offices)
(925) 737-3500
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
As of November 6, 2000, there were 23,726,144 shares of the Registrant's
Common Stock outstanding.
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<PAGE>
PROBUSINESS SERVICES, INC.
INDEX
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<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets as of September 30, 3
2000 and June 30, 2000....................................
Condensed Consolidated Statements of Operations for the 4
three months ended September 30, 2000 and 1999............
Condensed Consolidated Statements of Cash Flows for the 5
three months ended September 30, 2000 and 1999............
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 8
AND RESULTS OF OPERATIONS.................................
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK..... 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 19
ITEM 2. CHANGES IN SECURITIES....................................... 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 19
ITEM 5. OTHER INFORMATION........................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 19
SIGNATURES.................................................. 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROBUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 52,194 $ 27,585
Short-term investments.................................... 11,721 13,336
---------- ----------
Total cash, cash equivalents and short-term investments..... 63,915 40,921
Restricted cash........................................... -- 4,616
Accounts receivable, net of allowances.................... 11,667 10,769
Prepaid expenses and other current assets................. 4,386 5,304
---------- ----------
79,968 61,610
Payroll tax funds invested................................ 1,047,369 1,054,903
---------- ----------
Total current assets........................................ 1,127,337 1,116,513
Long-term investments....................................... 3,074 1,999
Equipment, furniture and fixtures, net...................... 42,393 40,535
Other assets................................................ 26,000 23,174
---------- ----------
Total assets................................................ $1,198,804 $1,182,221
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities, current portion of
capital lease obligations and deferred revenue.......... $ 26,654 $ 21,431
Payroll tax funds collected but unremitted................ 1,047,369 1,054,903
---------- ----------
Total current liabilities................................... 1,074,023 1,076,334
Long-term deferred revenue.................................. 13,061 13,061
Capital lease obligations, less current portion............. 332 376
Stockholders' equity........................................ 111,388 92,450
---------- ----------
Total liabilities and stockholders' equity.................. $1,198,804 $1,182,221
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
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Revenue:
Service fees.............................................. $ 22,881 $15,607
Interest income from payroll tax funds invested........... 7,940 5,347
-------- -------
Total revenue............................................... 30,821 20,954
Operating expenses:
Cost of providing services................................ 16,418 11,148
General and administrative................................ 5,406 3,395
Research and development.................................. 4,962 3,353
Client acquisition costs.................................. 14,857 10,058
-------- -------
Total operating expenses.................................... 41,643 27,954
Loss from operations........................................ (10,822) (7,000)
Interest expense............................................ (184) (129)
Interest income............................................. 1,009 969
-------- -------
Net loss.................................................... $ (9,997) $(6,160)
======== =======
Basic and diluted net loss per share........................ $ (0.42) $ (0.27)
======== =======
Shares used in computing basic and diluted net loss per
share..................................................... 23,588 22,864
======== =======
</TABLE>
See accompanying notes.
4
<PAGE>
PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(9,997) $ (6,160)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 3,191 2,479
Changes in operating assets and liabilities:
Accounts receivable, net.............................. (898) (1,659)
Prepaid expenses and other current assets............. 671 670
Other assets.......................................... 284 156
Accounts payable, accrued liabilities and deferred
revenue............................................. 2,021 (1,187)
------- --------
Net cash used in operating activities....................... (4,728) (5,701)
INVESTING ACTIVITIES
Sale of securities.......................................... 540 --
Purchases of equipment, furniture and fixtures.............. (4,776) (4,991)
Capitalization of software development costs................ (1,215) (1,515)
------- --------
Net cash used in investing activities....................... (5,451) (6,506)
FINANCING ACTIVITIES
Decrease in restricted cash................................. 4,616 --
Principal payments on capital lease obligations............. (58) (308)
Proceeds from issuance of preferred stock................... 29,996 --
Proceeds from issuance of common stock...................... 234 406
------- --------
Net cash provided by financing activities................... 34,788 98
------- --------
Net increase in cash and cash equivalents................... 24,609 (12,109)
Cash and cash equivalents, beginning of period.............. 27,585 73,575
------- --------
Cash and cash equivalents, end of period.................... $52,194 $ 61,466
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 87 $ 129
======= ========
</TABLE>
See accompanying notes.
5
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ProBusiness Services, Inc., ("ProBusiness" or the "Company") has prepared
its interim condensed unaudited consolidated financial statements, pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
The information included in this report should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in the Company's 2000 Annual Report on Form 10-K. The condensed
consolidated balance sheet as of June 30, 2000 has been prepared from the
audited consolidated financial statements of the Company.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the consolidated
financial position, results of operations and cash flows for such periods. The
results for the interim period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 2001 or for any future periods.
2. BASIC AND DILUTED NET LOSS PER SHARE
Shares used in computing basic and diluted net income (loss) per share are
based on the weighted average shares outstanding in each period. Basic net
income (loss) per share excludes any dilutive effects of stock options. Diluted
net loss per share includes the dilutive effect of the assumed exercise of stock
options using the treasury stock method. However, the effect of outstanding
stock options has been excluded from the calculation of diluted net loss per
share as their inclusion would be antidilutive. If the Company had reported net
income, the calculation of diluted net income per share would have included the
shares used in the computation of net loss per share, as well as an additional
767,000 and 1,096,000 common equivalent shares related to outstanding stock
options and warrants not included above (using the treasury stock method) for
the first three months of fiscal 2001 and 2000, respectively.
3. SEGMENT INFORMATION
The Company's Chief Operating Decision Maker who is the President and Chief
Executive Officer, evaluates performance based on a measure of consolidated
gross margin, operating profit before client acquisition costs and profit or
loss from operations. The accounting policies of the reportable segment are the
same as those described in the Company's Annual Report on Form 10-K for the year
ended June 30, 2000. The Company's condensed consolidated statements of
operations disclose the financial information of its reportable segment in
accordance with Statement of Financial Accounting Standards ("SFAS") SFAS
No. 131 "Disclosures about Segments of an Enterprise."
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND ACCOUNTING BULLETINS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
which is required to be adopted in fiscal years beginning after June 15, 2000.
The Company adopted SFAS No. 133 effective July 1, 2000. SFAS No. 133 requires
the Company to recognize all derivatives on the balance sheet at fair value. If
the derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
6
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND ACCOUNTING BULLETINS
(CONTINUED)
recognized in earnings. Any ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings and any derivatives that are
not hedges must be adjusted to fair value through income. Based on the Company's
derivative positions at September 30, 2000, the Company reported a net liability
of $1.3 million for the fair value of its derivative portfolio and a
corresponding offset in other comprehensive income.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Aspects of SAB 101
relevant to the Company primarily concern the timing of the recognition of
revenue and certain expenses related to arrangements that involve the receipt of
nonrefundable, up-front fees. SAB 101 requires that in particular situations the
nonrefundable fees and certain associated costs be recognized over the
contractual term or average life of the underlying arrangement. SAB 101 will be
effective for ProBusiness in the fourth quarter of fiscal year 2001. SAB 101
would not have a material impact on the Company's historical financial condition
or results of operations.
5. STOCKHOLDERS' EQUITY
On August 1, 2000, the Company authorized, issued and sold 1,132,075 shares
of 6.9% Senior Convertible Preferred Stock ("Preferred Stock") to certain
affiliates of General Atlantic Partners ("GAP") at $26.50 per share. The
Preferred Stock ranks senior to the Company's common stock ("Common Stock"). The
holders of the Preferred Stock are entitled to receive cumulative dividends at
an annual rate of 6.9% in the form of additional shares of Preferred Stock.
Dividends are payable quarterly on the first day of October, January, April and
July, commencing October 1, 2000. Upon liquidation of the Company, the holders
of the Preferred Stock are entitled to be paid an amount equal to $26.50 per
share. Any holder of Preferred Stock has the right to convert such holder's
shares of Preferred Stock into shares of the Company's Common Stock at a rate of
one share of Preferred Stock to one share of the Company's Common Stock, subject
to adjustments, as defined. The Company has the option to convert all of the
Preferred Stock to Common Stock on August 1, 2005 if the then current market
price of the Company's Common Stock is equal to or greater than $26.50 per share
at a rate of one share of Preferred Stock to one share of the Company's Common
Stock, subject to adjustments, as defined. If, as of any date after August 1,
2003, the then current market price of the Company's Common Stock is equal to or
greater than $39.00 per share (adjusted for stock splits, dividends,
recapitalizations or otherwise), the Company may, at its option, redeem any or
all of the then current outstanding Preferred Stock at $26.50 per share.
The holders of the Preferred Stock vote, as a single class, with the
Company's common shareholders, except that as long as affiliates of GAP own a
majority of the Company's Preferred Stock, the then holders of such Preferred
Stock are entitled to elect one director to the Company's Board of Directors. As
of September 30, 2000, a Partner of GAP is a member of the Company's current
Board of Directors.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF PROBUSINESS APPEARING
ELSEWHERE IN THIS QUARTERLY REPORT. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS
QUARTERLY REPORT.
OVERVIEW
ProBusiness is a leading provider of comprehensive outsourced administrative
services for large employers nationwide. The Company's primary service offerings
are payroll processing, payroll tax filing, benefits administration services,
human resources software, Web-based self-service and Shared Services, which
includes front-office administration for payroll, HR and benefits administration
and a comprehensive employee service center. The Company's proprietary PC-based
payroll system offers the cost-effective benefits of outsourcing and high levels
of client service, while providing the flexibility, control, customization and
integration of an in-house system.
The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. Since 1998, the Company has
experienced significant growth of its revenue, client base and average client
size. Revenue increased from $46.5 million in fiscal 1998 to $104.1 million in
fiscal 2000. From September 30, 1998 to September 30, 2000, the client base for
payroll processing services increased from 520 clients to approximately 615
clients, while the average size of the Company's payroll clients increased from
approximately 1,250 employees to approximately 2,030 employees. As of
September 30, 2000, the Company provided services to approximately 2,020
clients. The Company's revenue growth is primarily due to continued growth in
its client base, an increase in the average number of employees of its clients,
the introduction of new features and other services and a high retention rate of
existing payroll clients (approximately 90% for fiscal 2000). The Company does
not anticipate it will sustain this rate of growth in the future.
The establishment of new client relationships involves lengthy and extensive
sales and implementation processes. The sales process generally takes three to
twelve months or longer, and the implementation process generally takes an
additional three to nine months or longer. The Company has experienced
significant operating losses since its inception and expects to incur
significant operating losses in the future due to continued client acquisition
costs, investments in research and development and costs associated with
expanding sales efforts, service offerings and operations in new geographic
regions. As of September 30, 2000, the Company had an accumulated deficit of
$71.8 million. There can be no assurance that the Company will achieve or
sustain profitability in the future.
The Company's cost of providing services consists primarily of ongoing
account management, tax and Shared Services operations and production costs.
General and administrative expenses consist primarily of personnel costs,
professional fees and other overhead costs for finance, corporate services and
information technology. Research and development expenses consist primarily of
personnel costs. Client acquisition costs consist of sales and implementation
expenses and, to a lesser extent, marketing expenses.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items reflected in the consolidated
statements of operations expressed as a percentage of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,.
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Service fees.............................................. 74.2% 74.5%
Interest income from payroll tax funds invested........... 25.8% 25.5%
----- -----
Total revenue............................................... 100.0% 100.0%
Operating expenses:
Cost of providing services................................ 53.3% 53.2%
General and administrative................................ 17.5% 16.2%
Research and development.................................. 16.1% 16.0%
Client acquisition costs.................................. 48.2% 48.0%
----- -----
Total operating expenses.................................... 135.1% 133.4%
Loss from operations........................................ (35.1)% (33.4)%
Interest expense............................................ (0.6)% (0.6)%
Interest income and other, net.............................. 3.3% 4.6%
----- -----
Net loss.................................................... (32.4)% (29.4)%
===== =====
</TABLE>
REVENUE
Service fee revenue increased 46.6% in the first quarter of fiscal 2001 when
compared with the same period of fiscal 2000, primarily due to increases in the
number and average size of the Company's payroll and tax clients. Interest
income from payroll tax funds invested increased 48.5% in first quarter of
fiscal 2001 when compared with the same period of fiscal 2000, primarily due to
higher average daily payroll tax funds invested.
COST OF PROVIDING SERVICES
Cost of providing services increased 47.3% in the first quarter of fiscal
2001 when compared with the same period of fiscal 2000 and remained relatively
unchanged as a percentage of revenue at 53.3% compared with the first quarter of
fiscal 2000. The increase in absolute dollars was primarily due to increased
personnel in operations and account management resulting from an increase in the
client base and hiring of additional personnel to support the Company's new
service offering, Shared Services. The percentage of revenue remained unchanged
primarily as a result of decreases realized from the economies of scale realized
from servicing larger average size clients which is offset by additional
expenses incurred as a result of the new service offering.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 59.2% in the first quarter of
fiscal 2001 when compared with the same period of fiscal 2000 and increased as a
percentage of revenue to 17.5% in the first quarter of fiscal 2000 from 16.2% in
the first quarter of fiscal 2000. The increases in absolute dollars and
percentage of revenue were primarily attributable to increased investment in the
Company's information technology infrastructure and to the hiring of additional
management and administrative personnel to support the Company's growth.
9
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses increased 48.0% when compared with the
same period of fiscal 2000 and remained relatively unchanged as a percentage of
revenue at 16.1% when compared with the first quarter of fiscal 2000. The
increase in absolute dollars was primarily a result of additional personnel and,
to a lesser extent, the development of enhancements and new features to the
Company's existing services. Capitalized software development costs were
$1.2 million and $1.5 for the first quarter of fiscal 2001 and 2000,
respectively.
CLIENT ACQUISITION COSTS
Client acquisition costs increased 47.7% in the first quarter of fiscal 2001
when compared with the same period of fiscal 2000 and increased as a percentage
of revenue to 48.2% in the first quarter of fiscal 2001 from 48.0% in the first
quarter of fiscal 2000. The increases in absolute dollars in fiscal 2001 were
primarily due to the expanded sales and implementation force for payroll,
national tax and Shared Services, and to a lesser extent, to expenses related to
marketing.
INTEREST EXPENSE
Interest expense increased 42.4% in the first quarter of fiscal 2001 when
compared with the same period of fiscal 2000 and remained unchanged as a
percentage of revenue at 0.6% in the first quarter of fiscal 2001 compared with
the first quarter of fiscal 2000.
INTEREST INCOME AND OTHER, NET
Interest and other income increased 4.2% in the first quarter of fiscal 2001
when compared with the same period of fiscal 2000 and decreased as a percentage
of revenue to 3.3% in the first quarter of fiscal 2001 from 4.6% in the first
quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through a
combination of sales of equity securities, private debt and bank borrowings. The
Company raised approximately $27.0 million from its initial public offering in
September 1997 and approximately $80.7 million from its secondary public
offering in September 1998. On August 1, 2000, the Company authorized, issued
and sold 1,132,075 shares of 6.9% Senior Convertible Preferred Stock at $26.50
per share, raising approximately $30 million.
At September 30, 2000, the Company had approximately $52.2 million of cash
and cash equivalents, $11.7 million of short-term investments and $3.1 million
of long-term investments, as well as a $20.0 million secured revolving line of
credit, which expires in December 2000. At September 30, 2000, the Company had
no outstanding borrowings under the line of credit.
Net cash used in operating activities decreased $1.0 million for the first
three months of fiscal 2001 when compared to the same period of fiscal 2000. The
decrease in net cash used in operating activities for the first three months of
fiscal 2001 was primarily attributable to increases in accounts payable, accrued
liabilities, deferred revenue and depreciation and amortization and a decline in
the increase in net accounts receivable, partially offset by an increase in net
loss.
Net cash used in investing activities decreased $1.1 million for the first
three months of fiscal 2001 when compared to the same period of fiscal 2000. The
decrease in net cash used in investing activities related to an increase in the
sale of securities and decreases in the purchase of equipment, furniture and
fixtures and capitalization of software development costs.
10
<PAGE>
Net cash provided by financing activities increased $34.7 million for the
first three months of fiscal 2001 when compared to the same period of fiscal
2000. Net cash provided by financing activities for fiscal 2001 related
primarily to $30.0 million of proceeds from the issuance of senior convertible
preferred stock and a decrease in restricted cash.
The Company believes that existing cash and cash equivalent balances,
amounts available under its current credit facility and anticipated cash flows
from operations will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. The Company may also
utilize cash to acquire or invest in complementary businesses or to obtain the
right to use complementary technologies, although the Company does not have any
pending plans to do so. The Company may also sell additional equity or debt
securities or obtain additional credit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Aspects of SAB 101 relevant to the Company primarily
concern the timing of the recognition of revenue and certain expenses related to
arrangements that involve the receipt of nonrefundable, up-front fees. SAB 101
requires that in particular situations, the nonrefundable fees and certain
associated costs be recognized over the contractual term or average life of the
underlying arrangement. SAB 101 will be effective for ProBusiness in the fourth
quarter of fiscal year 2001. The Company believes that SAB 101 would not have a
material impact on the Company's historical financial condition or results of
operations; however, there can be no assurance that SAB 101 would not have a
material impact on revenue recognition in the future.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
OPERATING LOSSES; NEED TO COMMIT TO EXPENSE IN ADVANCE OF REVENUES. The
Company has experienced significant operating losses since its inception and
expects to incur significant operating losses in the future due to continued
client acquisition costs, investments in research and development and costs
associated with expanding its sales efforts, service offerings and operations to
new geographic regions. As of September 30, 2000, the Company had an accumulated
deficit of $71.8 million. The establishment of new client relationships involves
lengthy and extensive sales and implementation processes. The sales process
generally takes three to twelve months or longer, and the implementation process
generally takes an additional three to nine months or longer. In connection with
the acquisition of each new client, the Company incurs substantial client
acquisition costs, which consist primarily of sales and implementation expenses
and, to a lesser extent, marketing expenses. In connection with the expansion of
new service offerings, the Company incurs substantial operating costs associated
with hiring the management and operational infrastructure. These costs are
incurred in advance of revenues and are not scalable until the growth of clients
utilizing such services. The Company's ability to achieve profitability will
depend in part upon its ability to attract and retain new clients, offer new
services and features and achieve market acceptance of new services. There can
be no assurance that the Company will achieve or sustain profitability in the
future. Failure to achieve or sustain profitability in the future could have a
material adverse effect on the Company's business, financial condition and
consolidated results of operations.
SEASONALITY; FLUCTUATION IN QUARTERLY RESULTS. The Company's business is
characterized by significant seasonality. As a result, the Company's revenue has
been subject to significant seasonal fluctuations, with the largest percentage
of annual revenue being realized in the third and fourth fiscal quarters,
primarily due to new clients beginning services in the beginning of the tax year
(the Company's third fiscal quarter) and higher interest income earned on
payroll tax funds invested. Further, the Company's operating expenses are
typically higher as a percentage of revenue in the first
11
<PAGE>
and third fiscal quarters as the Company increases personnel to acquire new
clients and to implement and provide services to such new clients, a large
percentage of which begin services in the third quarter. The Company's quarterly
operating results have in the past varied and will in the future vary
significantly depending on a variety of factors, including the number and size
of new clients starting services, the decision of one or more clients to delay
or cancel implementation or ongoing services, interest rates, seasonality, the
ability of the Company to design, develop and introduce new services and
features for existing services on a timely basis, costs associated with
strategic acquisitions and alliances or investments in technology, the success
of any such strategic acquisition, alliance or investment, costs to transition
to new technologies, expenses incurred for geographic expansion, risks
associated with payroll tax, benefits administration and Shared Services, price
competition, a reduction in the number of employees of its clients and general
economic factors. Revenue from new clients typically represents a significant
portion of quarterly revenue in the third and fourth fiscal quarters. A
substantial majority of the Company's operating expenses, particularly personnel
and related costs, depreciation and rent, are relatively fixed in advance of any
particular quarter. The Company's agreements with its clients generally contain
penalties for cancellation. However, any decision by a client to delay or cancel
implementation of the Company's services or the Company's underutilization of
personnel may cause significant variations in operating results in a particular
quarter and could result in losses for such quarters. As the Company secures
larger clients, the time required for implementing the Company's services
increases, which could contribute to larger fluctuations in revenue. Interest
income earned from investing payroll tax funds, which is a significant portion
of the Company's revenue, is vulnerable to fluctuations in interest rates. In
addition, the Company's business may be affected by shifts in the general
condition of the economy, client staff reductions, strikes, acquisitions of its
clients by other companies and other downturns. There can be no assurance that
the Company's future revenue and results of operations will not vary
substantially. It is possible that in some future quarter the Company's results
of operations will be below the expectations of public market analysts and
investors. In either case, the market price of the Company's common stock could
be materially adversely affected.
RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND INVESTMENTS. The Company
has no current agreements or negotiations under way other than those described
above with respect to any acquisition of, or investment in, businesses that
provide complementary services or technologies to those of the Company. The
Company has in the past and intends in the future to make additional
acquisitions of, and investments in, such businesses. In addition, future
acquisitions could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities. Furthermore, there can be no
assurance that any strategic acquisition or investment will succeed. Any future
acquisitions or investments could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH PAYROLL TAX SERVICE, BENEFITS ADMINISTRATION SERVICE
AND SHARED SERVICES. The Company's payroll tax filing service is subject to
various risks resulting from errors and omissions in filing client payroll tax
returns and paying tax liabilities owed to tax authorities on behalf of clients.
The Company's clients transfer to the Company contributed employer and employee
payroll tax funds. The Company processes the data received from the client and
remits the funds along with a payroll tax return to the appropriate tax
authorities when due. Tracking, processing and paying such payroll tax
liabilities is complex. Errors and omissions have occurred in the past and may
occur in the future in connection with such service. The Company is subject to
large cash penalties imposed by tax authorities for late filings or underpayment
of taxes. To date, such penalties have not been significant. However, there can
be no assurance that any liabilities associated with such penalties will not
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company's reserves
or insurance for such penalties will be adequate. In addition, failure by the
Company to make timely or accurate payroll tax return filings or pay tax
liabilities when due on behalf of clients may damage the Company's reputation
and could adversely affect its relationships with existing clients and its
ability to gain new clients. The Company's payroll tax filing
12
<PAGE>
service is also dependent upon government regulations, which are subject to
continual changes. Failure by the Company to implement these changes into its
services and technology in a timely manner would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, since a significant portion of the Company's revenue is derived from
interest earned from investing on collected but unremitted payroll tax funds,
changes in policies relating to withholding federal or state income taxes or
reduction in the time allowed for taxpayers to remit payment for taxes owed to
government authorities would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's benefits
administration services are subject to various risks resulting from errors and
omissions in processing and filing COBRA or other benefit plan forms in
accordance with governmental regulations and the respective plans. The Company
processes data received from employees and employers and is subject to penalties
for any late or misfiled plan forms. There can be no assurance the Company's
reserves or insurance for such penalties will be adequate. In addition, failure
to properly file plan forms would have a material adverse effect on the
Company's reputation, which could adversely affect its relationships with
existing clients and its ability to gain new clients. The Company's benefits
administration services are also dependent upon government regulations, which
are subject to continual changes that could reduce or eliminate the need for
benefits administration services. The Company has access to confidential
information and to client funds. As a result, the Company is subject to
potential claims by its clients for the actions of the Company's employees
arising from damages to the client's business or otherwise. There can be no
assurance that the Company's insurance will be adequate to cover any such
claims. Such claims could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's Shared
Services offering is subject to various risks resulting from errors and
omissions in processing the data for a client's payroll. The Company processes
data received from employees and employers. Failure by the Company to process
this data accurately could result in errors or omissions in filing the client's
payroll tax returns and paying tax liabilities owed to tax authorities on behalf
of clients.
The Company has access to confidential information and to client funds. As a
result, the Company is subject to potential claims by its clients for the
actions of the Company's employees arising from damages to the client's business
or otherwise. There can be no assurance that the Company's fidelity bond and
errors and omissions insurance will be adequate to cover any such claims. Such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations.
INVESTMENT RISKS. The Company invests funds, including payroll tax funds
transferred to it by clients in short-term, top-tier, high-quality financial
instruments such as overnight U.S. government direct and agency obligations,
commercial paper and institutional money market funds, which are subject to
credit risks and interest rate fluctuations. These investments are exposed to
several risks, including credit risks from the possible inability of the
borrowers to meet the terms of their obligations under the financial
instruments. The Company would be liable for any losses on such investments.
Interest income earned from the investment of client payroll tax funds
represents a significant portion of the Company's revenues. As a result, the
Company's business, financial condition and results of operations are
significantly impacted by interest rate fluctuations. The Company enters into
interest rate swap agreements to minimize the impact of interest rate
fluctuations. There can be no assurance, however, that the Company's swap
agreements will protect the Company from all interest rate risks. Under certain
circumstances, if interest rates rise, the Company would have payment
obligations under its interest rate swap agreements, that may not be offset by
interest earned by the Company on deposited funds. A payment obligation under
the Company's swap agreements could have a material adverse effect on the
Company's business, financial condition and results of operations. A default by
the Company under its swap agreements could result in acceleration and setoff by
the bank of all outstanding contracts under the swap agreement and could result
in cross-defaults of other debt agreements of the Company, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
13
<PAGE>
MANAGEMENT OF GROWTH. The Company's business has grown significantly in
size and complexity over the past five years. This growth has placed, and is
expected to continue to place, significant demands on the Company's management,
systems, internal controls and financial and physical resources. In order to
meet such demands, the Company intends to continue to hire new employees, open
new offices to attract clients in new geographic regions, increase expenditures
on research and development, and invest in new equipment and make other capital
expenditures. In addition, the Company expects that it will need to develop
further its financial and managerial controls and reporting systems and
procedures to accommodate any future growth. Failure to expand any of the
foregoing areas in an efficient manner could have a material adverse effect on
the Company's business, financial condition and results of operations.
SUBSTANTIAL COMPETITION. The market for the Company's services is intensely
competitive, subject to rapid change and significantly affected by new service
introductions and other market activities of industry participants. The Company
primarily competes with several public and private payroll service providers,
such as Automatic Data Processing, Inc. and Ceridian Corporation, as well as
smaller, regional competitors. Many of these companies have longer operating
histories, greater financial, technical, marketing and other resources, greater
name recognition and a larger number of clients than the Company. In addition,
certain of these companies offer more services or features than the Company and
have processing facilities located throughout the United States. The Company
also competes with in-house employee services departments and, to a lesser
extent, banks and local payroll companies. With respect to benefits
administration services, the Company competes with insurance companies, benefits
consultants and other local benefits outsourcing companies. The Company may also
compete with marketers of related products and services that may offer payroll
or benefits administration services in the future. The Company has experienced,
and expects to continue to experience, competition from new entrants into its
markets. Increased competition, the failure of the Company to compete
successfully, pricing pressures, loss of market share and loss of clients could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISK ASSOCIATED WITH THE DEVELOPMENT AND INTRODUCTION OF NEW OR ENHANCED
SERVICES. The technologies in which the Company has invested to date are rapidly
evolving and have short life cycles, which requires the Company to anticipate
and rapidly adapt to technological changes. In addition, the Company's industry
is characterized by increasingly sophisticated and varied needs of clients,
frequent new service and feature introductions and emerging industry standards.
The introduction of services embodying new technologies and the emergence of new
industry standards and practices can render existing services obsolete and
unmarketable. The Company's future success will depend, in part, on its ability
to develop or acquire advanced technologies, enhance its existing services with
new features, add new services that address the changing needs of its clients,
and respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis. Several of the Company's
competitors invest substantially greater amounts in research and development
than the Company, which may allow them to introduce new services or features
before the Company. Even if the Company is able to develop or acquire new
technologies in a timely manner, it may incur substantial costs in developing or
acquiring such technologies and in deploying new services and features to its
clients, including costs associated with acquiring in-process technology,
amortization expenses related to intangible assets and costs of additional
personnel. If the Company is unable to develop or acquire and successfully
introduce new services and new features of existing services in a timely or
cost-effective manner, the Company's business, financial condition and results
of operations could be materially adversely affected. The Company has spent and
will continue to spend significant time and expense in the development of its
next generation platform, GOLDEN GATE-TM- and in the development and staffing of
its outsourced employee administrative services offering, Shared Services. The
Company cannot be certain that these services will be successfully developed.
Even if they are successfully developed, the Company cannot be certain that they
will be accepted by new or existing clients. In addition, prior to the rollout
of GOLDEN GATE, new clients may postpone their purchase of the
14
<PAGE>
Company's existing products and services in anticipation of the new technology
platform. If the Company is unable to timely, and successfully introduce, market
and deploy the GOLDEN GATE application platform or its Shared Services offering,
the Company's business, financial condition and results of operations could be
materially adversely affected.
DEPENDENCE ON THIRD-PARTY PROVIDERS. The Company depends on third-party
courier services to deliver paychecks to clients. The Company does not have any
formal written agreements with any of the courier services that it uses. Such
courier services have been in the past and may be in the future unable to pick
up or deliver the paychecks from the Company to its clients in a timely manner
for a variety of reasons, including employee strikes, storms or other adverse
weather conditions, earthquakes or other natural disasters, logistical or
mechanical failures or accidents. Failure by the Company to deliver client
paychecks in a timely manner could damage the Company's reputation and have a
material adverse effect on the Company's business, financial condition and
results of operations.
DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA. The Company currently
conducts substantially all of its payroll and payroll tax processing at the
Company's headquarters in Pleasanton, California, and divides the payroll
printing and finishing between its Pleasanton and Irvine, California facilities.
The Irvine facility serves both as an alternative processing center and a backup
payroll center. The Company's Shared Services are conducted solely in Bothell,
Washington, and no benefits administration back-up facility exists. The Company
establishes for each payroll client a complete set of payroll data at the
Pleasanton processing center, as well as at the client's site. In the event of a
disaster in Pleasanton, clients would have the ability to process payroll checks
based on the data they have on-site, if necessary. In addition, the Company has
developed business continuity plans for each of the Company's mission-critical
business units. There can be no assurance that the Company's disaster recovery
procedures are sufficient or that the payroll data recovered at the client site
would be sufficient to allow the client to calculate and produce payroll in a
timely fashion. The Company's operations are dependent on its ability to protect
its computer systems against damage from a major catastrophe (such as an
earthquake or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. No assurance can be given that the
precautions that the Company has taken to protect itself from or minimize the
impact of such events will be adequate. Any damage to the Company's data
centers, failure of telecommunications links or breach of the security of the
Company's computer systems could result in an interruption of the Company's
operations or other loss that may not be covered by the Company's insurance. Any
such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends on the
performance of the Company's senior management and other key employees. The loss
of the services of any senior management or other key employee could have a
material adverse effect on the Company's business, financial condition and
results of operations. If one or more of the Company's key employees resigns
from the Company to join a competitor or to form a competitor, the loss of such
personnel and any resulting loss of existing or potential clients to any such
competitor could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event of the loss of any
key personnel, there can be no assurance that the Company would be able to
prevent the unauthorized disclosure or use of its technical knowledge,
practices, procedures or client lists by a former employee or that such
disclosure or use would not have a material adverse effect on the Company's
business, financial condition and results of operations.
NEED TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL. The Company's success
depends to a significant degree on its ability to attract and retain experienced
employees. There is substantial competition for experienced personnel, which the
Company expects to continue. Many of the companies with which the Company
competes for experienced personnel have greater financial and other resources
than the Company. The Company has in the past and may in the future experience
difficulty in recruiting
15
<PAGE>
sufficient numbers of qualified personnel. In particular, the Company's ability
to find and train implementation employees is critical to the Company's ability
to achieve its growth objectives. The inability to attract and retain
experienced personnel as required could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISK ASSOCIATED WITH GEOGRAPHIC EXPANSION. A substantial majority of the
Company's revenue historically has been derived from clients located in the
western United States. The Company's ability to achieve significant future
revenue growth will in large part depend on its ability to gain new clients
throughout the United States. Growth and geographic expansion have resulted in
new and increased responsibilities for management personnel and have placed and
continue to place a strain on the Company's management and operating and
financial systems. The Company will be required to continue to implement and
improve its systems on a timely basis and in such a manner as is necessary to
accommodate the increased number of transactions and clients and the increased
size of the Company's operations. Any failure to implement and improve the
Company's systems or to hire and retain the appropriate personnel to manage its
operations would have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS. The Company's success is dependent in part upon its proprietary
software technology. The Company has no patents, patent applications or
registered copyrights. The Company relies on a combination of contract,
copyright and trade secret laws to establish and protect its proprietary
technology. The Company distributes its services under software license
agreements that grant clients licenses to use the Company's services and contain
various provisions protecting the Company's ownership and the confidentiality of
the underlying technology. The Company generally enters into confidentiality
and/or license agreements with its employees and existing and potential clients
and limits access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology. There can be no assurance
that the Company's services and technology do not infringe any existing patents,
copyrights or other proprietary rights of others, or that third parties will not
assert infringement claims in the future. If any such claims are asserted and
upheld, the costs of defense could be substantial and any resulting liability to
the Company could have a material adverse effect on the Company's business,
financial condition and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
common stock is likely to be highly volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new services by the Company or its
competitors, market conditions in the information services industry, changes in
financial estimates by securities analysts or other events or factors, many of
which are beyond the Company's control. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology and services
companies and that often have been unrelated to the operating performance of
such companies. These broad market fluctuations may adversely affect the market
price of the Company's common stock.
RISK ASSOCIATED WITH CONTROL BY PRINCIPAL STOCKHOLDERS. As of
September 12, 2000, the Company's directors and executive officers, and its
principal stockholders, together controlled approximately 32.0% of the Company's
voting stock. If these stockholders acted or voted together, they would have the
power to exercise a significant influence over the election of the Company's
directors and other matters requiring stockholder approval, including the
approval of significant corporate transactions. In addition, this concentration
of ownership may delay or prevent a change in control of the Company, even when
a change may be in the best interests of its stockholders. In addition, the
interests of these stockholders may not always coincide with the interest of the
Company or the interests of other stockholders.
16
<PAGE>
RISK ASSOCIATED WITH CONVERTIBLE PREFERRED STOCK. In August 2000 the
Company sold 1,132,075 shares of 6.9% Senior Convertible Preferred Stock. The
holders of the Convertible Preferred Stock are entitled to be paid $26.50 per
share before any amounts may be paid to holders of ProBusiness common stock in
the event of a merger, acquisition or liquidation of the Company. The holders of
the Convertible Preferred Stock are entitled to receive cumulative dividends at
an annual rate of 6.9% in the form of additional shares of Convertible Preferred
Stock. Therefore, the longer the Convertible Preferred Stock is outstanding, the
more dilution will be experienced by holders of the Company's common stock.
RISK ASSOCIATED WITH CHARTER DOCUMENTS AND DELAWARE LAW. Provisions of the
Company's certificate of incorporation, bylaws and Delaware law could make it
more difficult for a third party to acquire the Company, even if doing so would
be of benefit to its stockholders. In particular, the Company's certificate of
incorporation provides for three classes of directors. Each director in each
class is elected for a three-year term, and a different class is elected each
year. These provisions make it difficult for a third party to gain control of
the Company's board of directors.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS. Forward-looking statements
contained in this quarterly report are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995 and are highly dependent upon a
variety of important factors that could cause actual results to differ
materially from those reflected in such forward-looking statements. When used in
this document and documents referenced herein, the words "intend," "anticipate,"
"believe," "estimate" and "expect" and similar expressions as they relate to the
Company are included to identify such forward-looking statements. These
forward-looking statements include statements regarding the demand for
outsourcing employee administrative services; the Company's expansion of its
client base; the Company's intention to increase its direct sales force; the
development of a comprehensive and fully integrated suite of employee
administrative services; the Company's ability to offer additional services; the
initiation or completion of any strategic acquisition, investment or alliance;
the Company's ability to extend its technology leadership; the Company's ability
to attract and retain new clients; delays in or unsuccessful development of the
GOLDEN GATE integrated platform and the Shared Services product offering; the
extent and timing of market acceptance of these new products; the Company's
ability to minimize the impact of interest rate fluctuations; the Company's
ability to develop its financial and managerial controls and systems; the
opening of additional facilities; the sufficiency of the Company's back-up
facilities and disaster recovery procedures; the Company's ability to develop or
acquire new technologies; the Company's ability to attract and retain
experienced employees; the Company's ability to maintain a high payroll client
retention rate; the Company's ability to minimize the future impact of SAB 101
on the Company's financial condition or results of operations and the Company's
ability to increase its national presence. These forward-looking statements are
based largely on the Company's current expectations and are subject to a number
of risks and uncertainties, including, without limitation, those identified
under "Additional Factors That May Affect Future Results" and elsewhere in this
quarterly report and other risks and uncertainties indicated from time to time
in the Company's filings with the Securities and Exchange Commission. Actual
results could differ materially from these forward-looking statements. In
addition, important factors to consider in evaluating such forward-looking
statements include changes in external market factors, changes in the Company's
business or growth strategy or an inability to execute its strategy due to
changes in its industry or the economy generally, the emergence of new or
growing competitors and various other competitive factors. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this quarterly report will in fact occur.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In fiscal 2001, the Company held certain derivative based products to
mitigate interest rate fluctuation risk. The collateral exposure associated with
the various interest rate swap agreements are limited by interest rate caps held
by the Company. As of September 30, 2000, the Company held two interest rate cap
agreements with expiration dates of December 2000 and April 2002 and cap rates
of 7.75% and 8.0%, respectively. The aggregate fair value of these cap
agreements was a positive $57,000.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES
(b), (c) On August 1, 2000, the Company sold 1,132,075 shares of 6.9% Senior
Convertible Preferred Stock ("Convertible Preferred Stock") for an aggregate
purchase price of $30 million to affiliates of General Atlantic Partners LLC at
$26.50 per share. The investors consisted of General Atlantic Partners, 70,
L.P., GAP Coinvestment Partners II, L.P. and GapStar, LLC (together, "GAP").
David Hodgson, a managing member of General Atlantic Partners LLC, is a member
of the Company's Board of Directors. The Convertible Preferred Stock ranks
senior to ProBusiness common stock. The holders of the Convertible Preferred
Stock are entitled to receive cumulative dividends at an annual rate of 6.9% in
the form of additional shares of Convertible Preferred Stock. Dividends are
payable quarterly on the first day of October, January, April and July,
commencing October 1, 2000. The holders of the Convertible Preferred Stock are
entitled to be paid an amount equal to $26.50 per share before any amounts are
paid to holders of ProBusiness common stock in the event of a merger,
acquisition or liquidation of the Company. The Convertible Preferred Stock may
be converted at any time by the holder into shares of ProBusiness common stock
at a rate of one share of common stock for each share of Convertible Preferred
Stock, subject to adjustment. The Company has the option to convert all of the
Convertible Preferred Stock to common stock on August 1, 2005, if the then
current market price of ProBusiness common stock is $26.50 or more per share, at
a rate of one share of common stock for each share of Convertible Preferred
Stock. If, after August 1, 2003, the market price of ProBusiness common stock is
$39.00 or more per share, the Company may, at its option, redeem any or all of
the outstanding Convertible Preferred Stock at $26.50 per share. The conversion
rates and dollar amounts in the Convertible Preferred Stock terms are subject to
adjustment for ProBusiness stock splits, stock dividends and recapitalizations,
among other things, after the issue date of the Convertible Preferred Stock. The
holders of the Convertible Preferred Stock vote with the Company's common
shareholders as a single class, except that as long as GAP or other affiliates
of General Atlantic Partners LLC own a majority of the Convertible Preferred
Stock, the holders of Convertible Preferred Stock are entitled to elect one
director to the Company's Board of Directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See exhibit list following signature page.
(b) On August 16, 2000, the Company filed a Report on Form 8-K announcing
that on August 1, 2000, the Company received a $30 million investment
from affiliates of General Atlantic Partners LLC in exchange for
1,132,075 shares of ProBusiness's 6.9% Senior Convertible Preferred
Stock.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2000
PROBUSINESS SERVICES, INC.
(Registrant)
/s/ THOMAS H. SINTON
--------------------------------------------------------------------------------
President and Chief Executive Officer
/s/ STEVEN E. KLEI
--------------------------------------------------------------------------------
Senior Vice President, Finance and
Chief Financial Officer
20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
FOOTNOTE NUMBER EXHIBIT DESCRIPTION
--------------------- -------- ------------------------------------------------------------
<C> <C> <S>
(1) 2.1 Agreement and Plan of Reorganization, dated May 23, 1996,
between Registrant and Dimension Solutions.
(1) 2.2 Stock Acquisition Agreement, dated January 1, 1997, between
Registrant and BeneSphere Administrators, Inc.
(4) 2.3 Agreement and Plan of Reorganization, dated as of April 27,
1999, among ProBusiness Services, Inc., Runway Acquisition
Corp., Clemco, Inc. and certain other parties.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(1) 3.2 Bylaws of Registrant.
(1) 4.1 Specimen Common Stock Certificate of Registrant.
(1) 4.2 Amended and Restated Registration Rights Agreement, dated
March 12, 1997, between Registrant, General Atlantic
Partners 39, L.P., GAP Coinvestment Partners, L.P. and
certain stockholders of Registrant.
4.2(a) Amendment to Amended and Restated Registration Rights
Agreement, dated August 1, 2000, between Registrant,
General Atlantic Partners 39, L.P., GAP Coinvestment
Partners, L.P., General Atlantic Partners 70, L.P., GAP
Coinvestment Partners II, L.P. and GapStar, LLC.
(1) 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between
Registrant and certain purchasers.
(1) 4.6(b) Warrant to Purchase Series E Preferred Stock, dated July 31,
1996, between Registrant and T.J. Bristow and Elizabeth S.
Bristow.
(1) 4.6(c) Warrant to Purchase Series E Preferred Stock, dated November
14, 1996, between Registrant and SDK Incorporated.
(1) 4.6(d) Warrant to Purchase Series E Preferred Stock, dated November
14, 1996, between Registrant and Laurence Shushan and
Magdalena Shushan.
(4) 4.9 Waiver and Amendment dated as of April 27, 1999, among
ProBusiness Services, Inc., General Atlantic Partners 39,
L.P., GAP Coinvestment Partners, L.P. and certain
stockholders.
(4) 4.10 Registration Rights Agreement dated as of April 27, 1999,
between ProBusiness Services, Inc. and certain
stockholders.
(5) 4.11 Certificate of Designation of 6.9% Senior Convertible
Preferred Stock dated August 1, 2000.
(5) 10.1 6.9% Senior Convertible Preferred Stock Purchase Agreement
dated as of August 1, 2000 between ProBusiness
Services, Inc. and General Atlantic Partners 70, L.P., GAP
Coinvestment Partners II, L.P. and GapStar, LLC.
(3) 10.28 Sublease agreement, dated December 9, 1998, between
Registrant and Maritz, Inc.
27.1 Financial Data Schedule.
</TABLE>
------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-23189), declared effective on September
18, 1997.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (File No. 333-37129) filed with the Securities and Exchange
Commission on October 3, 1997.
(3) Incorporated by reference from the Registrant's report on Form 10-Q for the
period ended December 31, 1998.
<PAGE>
(4) Incorporated by reference from the Registrant's report on Form 8-K filed
with the Securities and Exchange Commission on May 12, 1999.
(5) Incorporated by reference from the Registrant's report on Form 8-K filed
with the Securities and Exchange Commission on August 16, 2000.
